The present invention relates generally to a data processing method and system for administering annuity retirement income benefits and, more particularly, to a data processing method and system for the efficient administration of both fixed and variable annuity products in the distribution, or payout, phase. The invention also relates to data processing and administrative systems used to administer such annuities that contain provisions which increase payments to the annuitant in the event specified contingencies occur, such as confinement in a long term care facility, or payment amounts falling below specified levels.
Annuities typically serve the useful function of providing economic protection against the risk of longevity. An annuitant has the option of electing a life-contingent retirement income, thereby transferring the risk of outliving one""s accumulated assets to the insurer.
A number of different kinds of annuities are available to meet the diverse needs of different individuals. These include deferred annuities and immediate annuities. In a deferred annuity, an individual is typically still in the xe2x80x9caccumulation phasexe2x80x9d of the annuity, amassing assets intended to sustain him or her during retirement years, when an earned wage from performing work is absent. In an immediate annuity, a lump sum of money is applied to purchase a series of retirement income benefit payments, with the first payment typically being made at the time of purchase, with subsequent benefit payments arriving each month thereafter.
The length of the term of the retirement income benefit payments is determined by the annuity benefit option elected by the annuitant. One type of annuity benefit option can provide lifetime income for the annuitant, regardless of how long he or she survives. Another type provides a similar benefit, but covers two lives, typically the annuitant and spouse.
Various types of additional guarantees can be attached to these life-contingent annuity benefit options. These include an option that guarantees the insurer will make at least a minimum number of monthly payments, typically 120 or 240. Another type of option guarantees that the insurer will pay out in benefits at least as much value as was applied to purchase the annuity. Increasing the guarantees typically has the effect of reducing the amount of the annuity benefit payments.
Non-life-contingent annuity benefit options are also available. For example, an annuity benefit that makes monthly payments for a specified period of time, such as thirty years, and then terminates is available.
Another distinction between the types of annuities available is whether it is classified as a xe2x80x9cfixed annuityxe2x80x9d or a xe2x80x9cvariable annuity.xe2x80x9d In a fixed annuity, the insurer bears the investment risks. In a deferred fixed annuity the insurer guarantees a rate of interest applicable to each annuity deposit. The guarantee applies for a specified period of time, often one year, and is then reset periodically, moving in an amount and a direction that correlate with fixed-income investment yields available to the insurer in the capital markets.
In a variable annuity, the annuity contract owner bears the investment risk during the accumulation phase of the annuity. The annuitant(s) bear(s) the investment risk during the distribution, or payout, phase of the variable annuity. The individual(s) (owner and/or annuitant, who can be the same person) controlling the variable annuity typically have a choice of funds in which they can direct that annuity deposits be invested. These funds typically each represent one asset class, such as large capitalization U.S. common stocks, corporate bonds, money market instruments, or international stocks.
In a fixed annuity, the account value during the accumulation phase only increases with time. In a variable annuity, the account value during the accumulation phase can either increase or decrease with time, depending on the performance of the fund(s) in which the annuity contract owner has directed that deposits be invested. The hope and expectation, but not guarantee, is that investments in the riskier asset classes typically associated with a variable annuity will provide long-term accumulated values superior to those of a fixed annuity. As annuities are geared toward providing retirement income, there typically is a long-term holding period.
FIG. 1 shows a chart and graph which compares a typical contract value under a variable annuity to a contract value under a fixed annuity earning 5% annually. As illustrated in the second column of the chart of FIG. 1, the net investment value for the variable annuity may vary and may be positive or negative.
In a fixed annuity, the dollar amount of each annuity benefit payment during the distribution phase is known with certainty at the time the account value is applied to the purchase of an annuity benefit option. (The point in time where the accumulated value of the deferred annuity is exchanged for a promise by the insurer of a series of future retirement income benefit payments is termed xe2x80x9cannuitization.xe2x80x9d) The fixed annuity benefit payments are typically level forever, such as $1,000 per month, or increase by a specified percentage, such as $1,000 per month, increasing by 3% each year. However, fixed annuity benefit payments are definitely determinable as to dollar amount at the point where the annuity contract owner elects the annuity benefit option from among his or her choices.
In a variable annuity, the dollar amount of each annuity benefit payment during the distribution phase is not known with certainty at the time the account value is applied to the purchase of an annuity benefit option. Rather, the annuitant(s) typically receive(s) the value of a specified number of annuity units each month. For example, if the annuitant is entitled to the value of 500 annuity units per month and the annuity unit value on the valuation date that determines the annuitant""s benefit is $2.00, the annuitant receives an annuity benefit payment of $1,000 that month. If, on the next succeeding valuation date that determines the annuitant""s benefit payment, the annuity unit value is $2.05, the annuitant receives an annuity benefit payment of $1,025 that month. If the annuity unit value on the subsequent valuation date is $1.95, the annuitant receives $975 that month.
In contrast to the fixed annuity benefit payments, variable annuity benefit payments are definitely determinable at the time of the annuity option election as to the number of annuity units that will determine the amount of the benefit payment on each future payment date. The variable annuity benefit payments are not definitely determinable as to dollar amount at the point when the annuity contract owner elects the annuity benefit option from among his or her choices.
For variable annuities, xe2x80x9caccumulation unitsxe2x80x9d are the measure of value during the accumulation phase. Each specific fund or xe2x80x9csubaccount,xe2x80x9d such as a domestic common stock fund, has an accumulation unit value that increases daily by realized and unrealized capital appreciation, dividends, and interest, and that decreases each day by realized and unrealized capital losses, taxes, and fees. The worth of a variable annuity contract owner""s account is the number of accumulation units owned in each fund multiplied by the accumulation unit value of each fund as of the most recent valuation date (typically daily).
For variable annuities, xe2x80x9cannuity unitsxe2x80x9d are the measure of value during the distribution phase. xe2x80x9cAnnuity unitsxe2x80x9d work very much like accumulation units, with one exception. Annuity units have built into them an assumed interest rate (AIR)xe2x80x94such as 3%, 4%, or 5%xe2x80x94at which a fund is assumed to grow annually in value. Thus, if a fund with a 5% AIR actually grew at 5% during a year, the annuity unit value for that fund would remain unchanged.
To the extent the fund performance exceeds the 5% AIR, the annuity unit value increases. To the extent fund performance falls short of the 5% AIR, the annuity unit value decreases. Since the monthly benefit payment to the annuitant is the number of annuity units payable times the annuity unit value, fund performance in excess of the AIR causes the monthly annuity benefit payments to increase. Fund performance less than the AIR causes the monthly annuity benefit payments to decrease.       Benefit          t      +      1        =            Benefit      t        xc3x97                  1        +        i                    1        +        AIR            
where: Benefitt+1=dollar amount of variable annuity benefit at time t+1
Benefitt=dollar amount of variable annuity benefit at time t
i=actual fund performance during period t to t+1 (as a %)
AIR=assumed investment rate during period t to t+1 (as a %)
Variable annuity benefit options of sufficiently long duration have historically provided an inflation hedge to retirees superior to that available under fixed annuities.
While annuitization guarantees lifetime income, the contractholder loses liquidity (and, depending on the type of annuity, some or all of the death benefit implied by full liquidity). During the accumulation phase, and subject to surrender charges, the contractholder has full access to the account value. After annuitization, the contractholder typically cannot withdraw account value in excess of that provided in monthly payments, and the death benefit available is either zero or limited in some way (e.g., paid only as a continuation of payments throughout the certain period). Because of this loss of liquidity and reduced (or non-existent) death benefit, many deferred annuity contractholders wanting periodic income choose not to xe2x80x9cannuitizexe2x80x9d (convert to an immediate annuity). Instead, they make systematic withdrawals from their annuity while maintaining it in its active, or accumulation, phase.
Systematic withdrawal programs from active, unannuitized deferred annuity contracts are an alternative mechanism (i.e., an alternative to annuitization) for distributing retirement income to contractholders. While these programs provide full liquidity, that liquidity requires some tradeoffs. For example, if withdrawals are set at a specified dollar level, then these distributions can fully deplete the account value. And, by definition, if withdrawals are established so as to pay out earnings and principal over a specified number of years, then these distributions will fully deplete the account value over this period. In either case, the contractholder can outlive the retirement income provided by this method of systematic withdrawal. Alternatively, if withdrawals are set as a percent of account value, then the period of distribution may be extended indefinitely, but a meaningful level of monthly retirement income may not be achieved. For example, if the percentage chosen is too high, the bulk of the account value will be distributed in the early years, leaving a much smaller account value base against which the same percentage will be applied, eventually resulting in inconsequential monthly retirement income payments.
The present invention provides a method for distributing income from an annuity in a manner that is superior to both annuitizations and systematic withdrawal programs. It is superior because the method joins the two programs seamlessly so as to provide lifetime income annuities which, for example, may provide systematic withdrawals of principal and earnings over a specified number of years and, after systematic withdrawals have exhausted the account value, continue periodic payments for the remaining life of the annuitant. When death of the annuitant(s) occur(s), any remaining account value would typically be paid to the annuitant""s beneficiary(ies). The annuitant(s) or owner(s) can be given access to the account value during the lifetime of the annuitants. For example, terms of the contract may permit the annuity to be surrendered for its commuted value, where commuted value is defined in the contract as the current account value less applicable surrender charges, if any. Also, the contract could permit partial withdrawals of, or additional deposits to, the account value with appropriate adjustment to future income benefits.
In addition to income benefits, certain embodiments of the invention described here can be used to deliver morbidity (and other insurance) benefits. For example, the contract may include a long-term care (LTC) benefit that provides additional monthly benefits during a period when the annuitant is unable to perform specified xe2x80x9cactivities of daily living.xe2x80x9d The benefit may further provide that these additional benefits are deducted from the account value in the same way that regular monthly benefits are deducted. In this instance, there is a cost to the insurance company for providing this benefit only if the annuitant receiving LTC benefits is still alive when the account value is exhausted. As a result, costs, and therefore premiums, for this benefit can be kept low. As another example, the contract could provide that, regardless of investment performance, each periodic payment will not be less than some specified amount. Again, because the account value is reduced by actual payments, benefits under this feature carry a cost for the insurance company only if the annuitant is still alive when the account is exhausted.
The costs associated with continuing periodic payments to the annuitant after such payments have exhausted the account value is covered either explicitly or implicitly by any of a variety of means. For example, the charge for this benefit could be an asset charge, such as 0.5% annually, applied against the account value. Alternatively, the charge could be a load, such as 5%, applied against the initial deposit, or it could be an amount, such as 7% of the current periodic payment, deducted from the account value each time a periodic payment is made.
In one way or another, the charges described above reduce the account value, and the higher the charge, the greater the reduction. Since the benefits paid on death or surrender are typically related to the account value, higher charges act to reduce these benefits. Because these benefits are reduced by higher charges, the level of periodic payments increases with higher charges. Thus, within limits, the invention described here permits programs where contractholders can elect the level of periodic payment to be received in relation to each $1,000 of initial deposits. For example, a charge in the form of a 10% initial load will result in higher periodic payments than those associated with a 5% initial load. However, death and surrender benefits associated with the 10% load will be less than those associated with the 5% load. Contractholders can choose between these two levels of charges (and, potentially, an unlimited number of other levels) to suit their preferences in regard to income level versus death and surrender benefits.
Certain embodiments of the present invention provide immediate annuities with life contingencies which are superior to other forms of immediate annuities with life contingencies. Unlike these other forms, these embodiments permit contractholders to xe2x80x9csee their money.xe2x80x9d Specifically, they embody an account value mechanism that enables death benefits and surrender benefits to be determined, and reported periodically, on the same basis as during the accumulation (deferral) phase of an annuity. Unlike other immediate annuities with life contingencies, these benefits are related directly (typically equal) to an account value which is simply the account value at the end of the prior period increased (decreased) by net investment earnings (losses) during the current period and reduced by the amount of any income payments (and charges and xe2x80x9cexcessxe2x80x9d withdrawals) during the current period. For example, the account value at the end of the prior month is $95,000.00, net investment earnings for the month are $900.00, and the amount of the periodic (monthly) income payment is $1,500.00, then the current account value would be $94,400.00.
The invention described here is applicable to both variable annuities and fixed annuities. In the case of variable annuities, changes in payments from period to period are governed by the same formula as is used for life annuities. The invention is further applicable to annuities containing contingencies on either one life or more than one life (e.g., xe2x80x9cjoint and survivorxe2x80x9d).
While some embodiments of the invention will include contract provisions in one immediate annuity contract, it is possible to split the provisions between two contracts. Doing so would permit the invention to be applied to mutual fund (or any liquid investment) systematic withdrawal programs, with charges assessed against mutual fund values funding a deferred annuity contract which will continue income payments for life once mutual fund values have been exhausted by periodic income payments.
Certain embodiments of the present invention provide a data processing method and apparatus for the determination and administration of annuity and other benefit payments, charges, and account value as described above and as will be described more fully below. One embodiment of the invention provides a data processing method for administering an annuity product having a guarantee of lifetime payments, comprising the steps of establishing a charge for the guarantee of lifetime payments, determining an initial benefit payment to be paid to a beneficiary, determining a subsequent periodic payment, periodically determining an account value, and periodically paying the subsequent payment and reporting the account value to the beneficiary. The charge for the guarantee of lifetime payments may be established in various ways, including determining a front end charge and deducting the front end charge from an initial deposit, determining a charge to be deducted from each periodic benefit payment, or determining an asset charge and periodically deducting the asset charge from the account value.
In those instances in which a front end charge is determined and deducted from an initial deposit, the front end charge is determined based upon at least one of a plurality of factors, including age, sex, liquidity, and interest rates. The initial benefit payment is preferably determined by the following formula:       Initial    ⁢          xe2x80x83        ⁢    benefit    =      Deposit    xc3x97                  (                  1          -          Charge                )            /              [                              ∑                          t              =              0                                                      12                ⁢                N                            -              1                                ⁢                                    xe2x80x83                        ⁢                          1              /                                                (                                      1                    +                    AIR                                    )                                                  t                  /                  12                                                                    ]            
Where: Charge=charge for lifetime guarantee (as a percent of deposit)
N=number of years account value is maintained
AIR=assumed investment rate (annual).
Subsequent periodic payments may be determined in a number of ways, including setting the subsequent benefit payment equal to the initial benefit payment, setting the subsequent benefit payment equal to the immediately preceding benefit payment (which may be the initial payment), or setting the subsequent benefit payment equal to the immediately preceding benefit payment increased by a predetermined percentage. The subsequent periodic benefit payment may also be determined by the following formula:
Benefitt+1=Benefittxc3x97(1+1)/(1+AIR)
Where: Benefitt+1=dollar amount of variable annuity benefit at time t+1
Benefitt=dollar amount of variable annuity benefit at time t
I=actual fund performance during period t to t+1 (as a %)
AIR=assumed investment rate for the period t to t+1 (as a %).
In embodiments where the charge for the guarantee of lifetime payments is a charge to be deducted from each payment, the initial benefit payment may be determined by the following formula:       Initial    ⁢          xe2x80x83        ⁢    benefit    =      Deposit    xc3x97                  (                  1          -          Charge                )            /              [                              ∑                          t              =              0                                                      12                ⁢                N                            -              1                                ⁢                                    xe2x80x83                        ⁢                          1              /                                                (                                      1                    +                    AIR                                    )                                                  t                  /                  12                                                                    ]            
Where: Charge=level charge for lifetime guarantee (as a percentage of each benefit payment)
N=number of years account value is maintained.
AIR=assumed investment rate (annual).
As with the previous embodiment, the subsequent periodic benefit payments may be determined by a variety of methods, including those described above.
In one alternative embodiment in which the charge for the guarantee of lifetime payments is deducted from each benefit payment, the initial benefit payment is determined by the following formula:       Initial    ⁢          xe2x80x83        ⁢    benefit    =      Deposit    /          [                        ∑                      t            =            0                                              12              ⁢              N                        -            1                          ⁢                              xe2x80x83                    ⁢                      1            /                                          (                                  1                  +                  AIR                                )                                            t                /                12                                                        ]      
Where: AIR=Assumed Investment Rate (Annual)
N=number of years account value is maintained. In this embodiment, the subsequent periodic benefit payment may be determined by the following formula:
Subsequent Benefitt+1=Gross Benefitt+1xe2x88x92Charge
Where: Gross Benefitt+1=Gross Benefitt+1xc3x97(1+1)/(1+AIR)
Gross Benefit+dollar amount of gross variable annuity benefit at time t+1
Gross Benefitt=dollar amount of gross variable annuity benefit at time t
I=actual fund performance during period t to t+1 (as a %)
AIR=assumed investment rate for the period t to t+1 (as a %)
Charge=level dollar charge from each benefit payment for lifetime guarantee
In other embodiments, the charge for the guarantee of lifetime payments is an asset charge periodically deducted from the account value. In one particular embodiment, the step of deducting the asset charge from the account value includes the step of applying a lower credit rating in the periodic determination of the account value. In any of these embodiments, the initial benefit payment may be determined by the following formula:       Initial    ⁢          xe2x80x83        ⁢    benefit    =      Deposit    /          [                        ∑                      t            =            0                                              12              ⁢              N                        -            1                          ⁢                              xe2x80x83                    ⁢                      1            /                                          (                                  1                  +                  AIR                                )                                            t                /                12                                                        ]      
Where:
N=number of years account value is maintained.
AIR=assumed investment rate (annual).
As before, the subsequent periodic payments may be determined by a variety of methods.
In other embodiments, the system and method of the present invention include providing either one or both of a death benefit and a cash surrender benefit. Either or both may be related to the account value. For example, in one embodiment, the death benefit is equal to the account value, and the cash surrender benefit is equal to the account value reduced by a surrender charge.
In certain embodiments of the invention, the account value is periodically determined by the following formula:
Account valuet=Account valuetxe2x88x921xe2x88x92Withdrawalstxe2x88x92Gross Benefitst+Depositst+Earningst
Where: Earningst=interest credited (fixed annuity) or investment return (variable annuity)
Gross Benefitst=Benefitst+Charges.
In these or other embodiments, the account value may be determined throughout the time between periodic reports to the beneficiary, and may be accessed by demand of the beneficiary (for instance, via telephone or computer network).
In certain embodiments, the system and method of the present invention provides an annuity product which has a long term care insurance benefit. In these embodiments, a charge for the long term care insurance benefit is determined. This charge may be determined in the same (or similar manner) as the charge for the guarantee of lifetime payments.
Certain embodiments of the invention may provide for partial withdrawals or additional deposits by the beneficiary. In such embodiments, the system and method may include redetermining the subsequent periodic benefit payment (and possibly other values associated with the account) in the event of a partial withdrawal or additional deposit.
Other objects, advantages and novel features of the present invention will become apparent from the following detailed description of the invention when considered in conjunction with the accompanying drawings.